Importance of Home Inspections

Importance of Home Inspections using a home inspector

Home inspections are an all-encompassing examination about the home condition. This is a process that is mostly ignored by buyers. A home is an important purchase and a home inspection is an inexpensive way of discovering the homes universal condition. Thus, to avoid a costly mistake, it is recommended to do home inspections so that you do not end up purchasing properties requiring major repairs.

A professional who is a certified home inspector conducts general inspection of the home. Generally, a good home inspector assists the buyer in exactly understanding what to acquire. A home may appear ready-to-move position, but it is an home inspector who considers the features such as plumbing, electrical wiring, insulation, roofing and structural features and unveils issues that fails to gain attention of the buyer.

A buyer must understand exactly about the home before purchasing as he is making a vast investment. Having a certified home inspector do a thorough inspection of the property is essential. Home inspection processes are done in different types before purchasing a home. Importantly, a certified home inspector inspects the exterior, structure, electrical, roof, HVAC, plumbing, insulation, interior and ventilation. As the inspection is complete, the home inspector provides a report suggesting repairs or improvements essential meeting the current standards.

Home inspections reveal problems that could be pricey.  This also may be a great tool in negotiating with the seller.  As a buyer you may negotiate the price based on the findings of the home inspector.  During inspection within the home, if flaws were found, the buyer has an opportunity to negotiate based on the repairs he has to pay or about the issues he may find problematic.

  • Another very important home inspection process is the termite/wood destroying inspection. The home inspector checks for structural damage signs caused by wood boring insects. A general home inspector also performs this inspection if he is paid an additional cost.

 

  • A radon inspection is also done importantly before buying a home as it is considered dangerous to health. Radon is a gaseous element that is a breakdown of radium and occurs in granite areas. A radon test is done using a radon kit that is hung or placed in the house for a period of two to seven days. If the test is high, alleviating radon meant seal concrete slab floors, water drainage systems and basement foundations.

 

  • Other inspections include well water testing, septic tank testing and oil tank testing.  General home inspectors are qualified to perform all the tests. It is important you check the qualifications of the home inspector and if required consider skilled professionals.

Where to Invest?

One question some people have is where should I look? Should I look in the wealthy areas, the middle class areas, the poor areas or the hood? To some extent any of them will work, they just take somewhat different strategies and temperaments.

Investing in Really Bad Areas

If you want to invest in the hood, the really bad areas, are you comfortable going to those areas? What about at night? Yes, you can get properties for very little money, but it might be a bit more difficult to get financing than in somewhat better areas.

In addition, how much of a hard ass are you about being a landlord. If you are a soft touch, you are going to get abused financially as a landlord, especially in these areas. If you aren’t really tough and experienced as a landlord, or have someone who can do property management for you, avoid these areas.

There will be little appreciation in value, in fact, possibly depreciation depending on what is happening in the area. Also, if you want to sell, you will probably only be able to sell to another landlord who is also going to be looking for a deal.

Investing in Expensive Areas

If you want to go for the really expensive areas, you will probably be looking for foreclosures. You would then do any repairs necessary and sell it. This is called flipping or wholesaling. Flipping is legal, but got a bad name because a lot of people committed fraud while doing it. Fraud is obviously not legal. It would be tough to buy a place in this price range and rent it out and make it cash flow. Also, if you make a mistake or miscalculation it is going to cost you a lot more money on one of these properties.

Most investors go for the last two categories. If you are new to investing, this is where you should be looking.

Investing in Middle Class Homes

Middle Class “cookie cutter” homes is an area many people like. These are good for either fixing up and selling or for renting. Both depend on getting the right price as with any real estate transaction.

John Schaub, a very wise investor and a nationwide speaker on real estate only invested in these types of areas. He looked for properties he could rent. He figured the tenants would pay off the mortgage and then he had a great long term income stream.

In these areas you have a greater chance of appreciation than in poorer areas and they will weather any market downturns better than poorer areas. The other thing is that if you are looking to sell, you have a much larger pool of buyers. For expensive homes, the pool of buyers is small and for poor neighborhoods and especially the hood you also have few buyers except for landlords who are also looking for a deal.

Investing in Poor Areas

So the downsides of the poor areas were kind of covered above. They are likely to have less appreciation and there are fewer homeowners to buy the property. It can be a good area to build up rentals for income but the people tend to be harder on houses and do more damage than in more middle class areas.  You will also probably be a bit more challenged landlording in these areas. However, the prices are cheaper so you can potentially get more property.

If you are savvy and know what the trends are, you can do very well by investing in a poor area that is being gentrified and moving to middle class. That way you get the best of both.

Hope that helps.

Subject To Purchase

What is Subject To?

It means buying subject to the existing mortgage. You write a contract with the owner but the original agreement between the bank and the seller stay in place.

The terms can be whatever are agreed to. For example, you agree to pay the mortgage for 2 years and then pay off the mortgage. In this case, the price is the amount of the mortgage. Or you could agree to pay the mortgage but when you pay off the loan by refinancing or selling, you have agreed to pay another amount besides just the mortgage.

The amount of sale could possibly be below the amount still due on the mortgage and the seller would have to come up with the difference.

Who owns what?

So once the transaction is done, the buyer owns the deed and has control of the house. The mortgage is still in the seller’s name. The buyer has not assumed the mortgage and has no obligations there unless something has been written into the purchase contract. But the mortgage company has no rights over the buyer. If payments are stopped, the only person who will be hurt is the seller. But it is completely unethical to go into a transaction expecting to never pay the mortgage and screwing the seller. This will quickly destroy your reputation. Don’t even think about it.

Due on Sale Clause?

Basically all mortgages have a due on sale clause which says that if ownership changes or other factors change, the bank has the right to call the full amount of the mortgage due. BUT, It is at the bank’s choice. It doesn’t have to call the loan due and if the loan is current and being paid on time, it is unlikely to. Why?

When interest rates on existing mortgages were 6-8% and the going rate for new mortgages was 12-14%, it made sense for the banks to exercise the due on sale clause because they could make more money with a new loan.

And now? Say the existing loan is 6-8% and rates are in the 3-4% range. Why would a bank call a loan that is being paid? In addition, if they have to go through the foreclosure process, they have significant expenses and probably aren’t getting paid anymore.

In addition, because of regulations banks need to keep a certain amount of assets as cash or liquid assets that are easily sold. But they are also able to lend out multiple times their assets. If the reserve requirement is 10%, they can lend out 10 times their assets. So, if they foreclose on a $200,000 loan, that is considered a bad asset and that is $2 million less that they can not loan out and make money on.

Why sell subject to?

People are frequently willing to sell subject to when they need to sell quickly or have a financial problem and are worried about their credit being hurt. There may also be no equity in the property and they want to sell but can’t afford to pay the costs. They may be moving or getting married or divorced or buying another house and need to sell this one quickly.

Frequently the main worry is that the mortgage will be paid. You can explain that you have incentive to pay or you will lose any equity in the house. You can also set up payment through a third party. That way they will know it is getting done and you definitely don’t want to pay them and hope they pay the mortgage. You could set up a joint bank account with autopay to the lender as a solution too. Other than autopay you would want any withdrawals to need both signatures.

Why buy subject to?

It is a no money down way to buy property unless you have to catch up some back payments. You don’t need to qualify for a mortgage and don’t need to come up with a down payment. It is great for investors, people with damaged credit and can’t get a loan but who have cash flow, or young people trying to get into their first house.

How to Make Money?

If the rents in the area are $1200 a month and the mortgage is $1000 a month, you will be making $200 a month. (Put the money aside and don’t spend it in case you need it for repairs.)

What if the rents in the area are $1000 instead? You would have no interest in the deal because you don’t want to just break even, you want a minimum of $200 per month cash flow to be worth it. Some sellers will pay you the $200 per month just to keep their credit from being trashed. It is far better than paying the mortgage of $1000 per month.

If rents are below the mortgage amount it is still possible the seller will pay the difference and your $200/month postive cash flow.

Another way to make money is to spend the money you might have paid on a downpayment in fixing up the property. Then sell the property and make your money that way.

A book that goes into all of this is by Wendy Patton.

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The above is informational only and not legal advice. Each state has different laws and frequently there are differences between counties, cities and towns. You need to check with your lawyer and other appropriate professionals.

Finding Properties

One of the biggest problems is not financing, it is finding good deals. Financing was somewhat of a problem at the worst of the recent recession because banks had pulled back so much of their activity, but there were still private funds available. As we have heard many times and seen it proved, if you find a good deal, the money will happen.

Assuming you have money, the easiest is to use a real estate agent or develop a network of finders. (Discussed in Acquiring Properties) Or you can use a wholesaler.

Real Estate Agents

Real Estate Agents – The problem here is that most are used to vanilla transactions with homeowners and they don’t know any investors and they don’t know what a good deal looks like. Others do know what they are doing, but they keep the good deals for themselves. Others know but aren’t interested because of the work involved. Why? Because every offer you make is not going to get accepted. Your offers will follow a formula and they are often well below asking price. A lot of offers will be rejected. There is a lot of paperwork for the agent to put together an offer, so he or she can get tired of only 1 in 10 or 20 offers being accepted.

The odds might get better over time as you get a feel for who to make offers to, but it is still a numbers game. Another problem is that frequently it is easier to find deals in lower priced housing. It takes the agent the same amount of work to create the paperwork for a million dollar house as a $50,000 dollar house. There will be more expenses in marketing the million dollar house, but their commission is also a lot larger.

You are probably going to need to train an agent you work with on what you are looking for. Most agents don’t think the way investors do. There are exceptions. The fastest growing real estate company in the country and one of the largest is Keller Williams. Its head is Gary Keller who has written a number of books and believes that agents are perfectly positioned to find and invest in real estate. Despite this, many Keller Williams agents still just stay in the traditional model. However, he has written some excellent books on investing.

Gary’s books include the Millionaire Real Estate Investor as well as the books Flip and Hold.

Bird Dogs

You can also get people to find property for you and pay them a fee.  This is often called a bird dog. There may be some legal issues here, but there are ways around it. One way you can find people is through Craigslist and another is going to your local real estate meetings. Most are known as Real Estate Investment Associations (REIA) and the name of the area they are in. If you google that, you should find clubs in your area. Or go to http://www.nationalreia.com/ and check out their list of local clubs. They are a good place to find contacts and information.

Wholesaling

This is where you can also find wholesalers. These are people who find properties and put them under contract and then flip the contract to you before their deadline to close on the property. This is perfectly and done by people selling malls and apartment buildings and other transactions in the millions of dollars. Flipping got a bad name because some people were doing it illegally. They were getting inflated appraisals and doing other fraudulent things. Flipping in and of itself is perfectly fine and legal. For that reason, many investors now call it flipping. Banks who were burned a few years back can also be leary.

Drive & Learn

If you don’t use other people to find properties, how do you find them? You can look at Craigslist ads or place them yourself. A tried and true method is driving. Pick an area and get familiar with it.

So, how do you pick an area? You want middle income homes. Why? You may find a deal in the $800,000 to $2 million dollar houses, but is will not be often. Plus, how many people will then have the capital to be able to purchase it. You are dealing with a very small slice of the market. Not a good idea.

What about the low end? That market is mostly renters so you are only going to be dealing with investors. Also not a good idea for this particular purpose. For buy and hold it might not be a bad area but not for this.

You probably want houses  in the $150,000 – $300,000 range. That will change depending on where you are. In some really high priced markets it may be a bit higher and in some areas of the country where real estate prices are much lower overall it will be lower than this range. Check out the pricing in your region. You want where the bulk of the home buyers can afford.

If you drive all over randomly it won’t work well. The idea is to get familiar with an area so you know what is going on there. Take a map (if they still make them) and lay out a pattern. Drive every street. Take notes on what you see. Be on the lookout for houses that need paint badly or the lawn hasn’t been cut in ages. Write down these addresses. You can also walk a street and talk to people and ask them if they know anyone that needs to sell. People don’t like rundown houses on their street. It brings down everyone’s value. If you tell them that you are looking to purchase, fix up and sell to a homeowner, they will probably be willing to point you in the right direction or if you give them a card, they might call you if they hear of something. You want to get known as the go to guy/gal in the area.

Once you get home, go in the internet and find out who owns the house and then contact them. This is very easy in some states and in other states who are way behind the times technologically it can be tough. In the worst case, if you know a real estate agent or a title attorney, you could ask them to find out for you. Repay the favor by using them in the transaction where it makes sense.

The above is informational only and not legal advice. Each state has different laws and frequently there are differences between counties, cities and towns. You need to check with your lawyer and other appropriate professionals.

Acquiring Properties cont’d

Another way you can acquire property is with lease options . Once again, check with your lawyer to make sure you are doing this correctly. You may need some money for this.

Here is what you are looking for. Find someone who wants to sell their house but is upside down. In other words, they owe more than the house is worth or about the same as what it is worth but they still need to pay closing costs. Even better, they might have lost their job and really want to move. (If they owe too much more than the value, it may not be a good deal because you want to eventually be able to sell the house for a profit.) The other consideration is what are rents in the area. Because you need the rent to be higher than the monthly mortgage amount.

You then write a quit claim deed with the owner which transfers ownership of the property but not the mortgage, but with the promise that you will pay the mortgage. (The rules vary by state and in places have gotten a bad name because some people have misused them and taken advantage of people. Use a lawyer to make sure you do it right.) Or you could write an option to buy the house written in a way that gives you control of the house.

You then find someone to rent the house. But you do this as a lease option. Typically you would want someone with bad credit because of a large hospital bill, a divorce, job loss etc. but who is starting to bounce back. They have good income, maybe savings, but because of the hit to their credit, they can’t get a mortgage for another year or two. They would lease the house with an option to buy.

You can get an option fee or downpayment which can be fairly large. This is usually non-refundable. The rent is also higher than market rent because the amount above the market rent goes towards the downpayment for the house as well. John Reed did a nice article on the problems with lease options.

So after 1-3 years,  whatever the term, the lessee will need to buy the house or the option terminates.

In this way, you can control a house and generate cash flow without actually buying it in the traditional sense.

The above is informational only and not legal advice. Each state has different laws and frequently there are differences between counties, cities and towns. You need to check with your lawyer and other appropriate professionals.

Acquiring Properties

Acquiring properties depends on whether you have money or not. If you have money it can make things easier, but it is also easier to make big mistakes as you are learning.

Act as a Finder / Bird Dog

If you have little money, one way to get started in real estate investing is to find property for investors with money and get paid finders fees. Some will pay $500 per deal, others will pay some sort of percentage. Some investors are real tightwads and others are more generous because they want you to keep coming back with more deals. We have heard of some investors paying finder’s fees of $1,000, $2,000 and even $10,000 for a really good deal.

Wholesaling

Another method you can use is wholesaling. This is a bit riskier than acting as a finder. In this case, you find a good deal and put a contract/offer on it and then sell the contract to an investor. This requires that you know what a good deal is. You need to find a deal that not only has enough profit margin for the investor but enough for you to make some money as well.

Why would an investor pay you a finder’s fee or buy a contract from a wholesaler? Time. Frequently, they are so busy arranging for the contractors and then selling that they don’t have enough time to find deals. All aspects of the process take time and resources. But also, if you bring deals where they can make money based on the criteria they are searching for, they don’t care whether they found it themselves, a real estate agent brought it to them, or you brought it to them. Remember, if a real estate agent brings the deal to them, they have to pay for that as well.

One thing to note. As far as we know, there are no restrictions on wholesaling since there are no restrictions on signing a contract to purchase a property, and the same goes for selling the contract. Real estate agents tend to protect their turf and in many states, you need to be careful about receiving fees where you could be seen to be acting as a real estate agent without a license. You should find an attorney in your area and ask them for clarification.

The Right Attorney

Regarding attorneys – You can probably have a first meeting and ask some basic questions without having to pay. After that, they will probably want some compensation but it may not be that much depending on what it is. Finding the right attorney is important. Some states require attorneys to do the transaction and others don’t. But, a lot of real estate attorneys (primarily title attorneys) just do vanilla deals of regular home buyers and regular mortgages. You don’t want them. There are lawyers who do that but also work with a lot of investors. That is who you want. They can give you a lot of great advice, but can also give you some good contacts for other aspects of the investing business.

I think that is enough for now. We will cover some more things you can do without much money such as lease options and other things if you have some money. Till later.

The above is informational only and not legal advice. Each state has different laws and frequently there are differences between counties, cities and towns. You need to check with your lawyer and other appropriate professionals.